Ethics & Public Policy Center

A Clear Path for Repealing and Replacing Obamacare Is Coming into View

House and Senate leaders deserve a lot of credit for putting together a bill that repeals much of Obamacare and skillfully navigating it through both chambers using the budget-reconciliation process. That’s no small achievement, though President Obama is sure to veto the bill as soon as it reaches his desk.

But it’s likely to be only a partial preview of what could happen in 2017 — if a Republican wins the White House. It is telling that the bill Congress is poised to send to President Obama delays repeal of Obamacare’s Medicaid expansion and health-insurance subsidies for two years. That way, Republican senators could promise their constituents that a replacement for Obamacare would be put in place before the federal funding for their plans was withdrawn. If there is an opportunity to repeal Obamacare in 2017, these senators (and many House members too) will want to include the replacement provisions in the same legislation rolling back Obamacare.

That’s also likely to be the case for a Republican president in 2017. Obamacare is unstable, and full of problems, but that does not mean returning to the pre-Obamacare status quo will be an attractive option for a newly elected president. A Republican president will want to put in place a program that is better than Obamacare. That means providing access to health-care coverage that is better than Medicaid or what is offered on the exchanges. House speaker Paul Ryan understands this. He pledged this week that the House will take up and pass a plan to replace Obamacare next year. Passing a bill in the House would force more compromise among different factions on a precise replacement plan and lay the groundwork for legislative action in 2017.

So a clear path for repeal and replace is now coming into view. But to stay on that path, Obamacare opponents need to address, right now, three critical aspects of the effort.

First is the question of risk-corridor payments under Obamacare. These are the payments made to insurers with “excessive” losses from the plans they offer on the exchanges. Senator Marco Rubio successfully inserted a provision into last year’s omnibus appropriations bill requiring these payments to be “budget neutral,” meaning any payments to the “losing” insurers had to come from the profits of the “winning” insurers. Since there are so few Obamacare “winners,” Rubio’s provision has had the effect of severely restricting risk-corridor payouts in 2015.

This is the most important restriction Republicans have placed on Obamacare since they took control of the House in 2011. It signals to insurers that they cannot count on taxpayers to bail them out for lowballing the premiums they charge on the exchanges. The result is that insurers are now being forced to charge more realistic premiums for their coverage, making it clear to more middle-class families that Obamacare insurance is not a great deal for them. No insurer can afford to stay in a market that leads to consistent and large losses, and it is beginning to look like Obamacare is just such a market.

To build momentum for repeal and replace, it is critical that the Rubio provision again gets attached to this year’s omnibus bill. Republicans must hold firm on this as they negotiate the terms of the legislation over the next week.

A second important question is the “Cadillac” tax, which imposes a 40 percent excise tax on plans with premiums above certain dollar thresholds, and which would be fully repealed by the bill Congress will send the president. There are many reasons to dislike this tax, which is scheduled to take effect in 2018. It is poorly designed and was sold on false pretenses by the Obama administration. White House officials claimed it would be paid by employers and insurers, not workers. That is false. Employers are already adjusting their plans to lower premiums and make it easier to avoid the tax when it is implemented. These adjustments, such as raising deductibles, have shifted costs onto workers and generated bipartisan interest in repealing the tax.

Republicans would be foolish to do so before they have a chance to offer a full replacement plan. Many of the GOP plans to replace Obamacare would impose some change on the tax preference for employer-paid premiums. There are good reasons to do this. The tax break is open-ended today, which means it goes up with the expense of an employer plan. The Cadillac tax imposes a uniform penalty on high- and low-income workers alike. It would be better to include premiums above a certain threshold in the taxable compensation of workers, thus ensuring that higher-income workers pay more than their lower-wage counterparts.

But the GOP will not get the chance to replace the Cadillac tax if it gets repealed before the 2016 election. There are rumors that both parties might be interested in full repeal of the tax as part of a large, grab-bag tax bill being assembled by the relevant committees in Congress. If repeal happens now, the GOP will be on record opposing the Cadillac tax, which will make it next to impossible to make a change in the tax treatment of employer-sponsored plans in 2017. And without a change in the tax treatment of employer plans, it will be very difficult to assemble a credible plan to fully replace Obamacare.

All of these plans feature a refundable tax credit for households that buy health insurance on their own. For decades, tax law has favored job-based health insurance by excluding premiums paid by employers from taxable income. Predictably, with a big tax break available for coverage secured through work, most Americans wanted to get insurance that way rather than on their own. The emerging consensus among Obamacare opponents is that people who do not get health insurance on the job should get a tax credit for the purchase of private health insurance that is roughly equivalent to the value of the average tax break for employer coverage.

Obamacare provides premium credits for these households, but the tax credits proposed by the authors of the replacement plans would be different. They would come with almost no strings attached. There would be no one-size-fits-all plan that everyone must buy. And people would not be required to get their credits through a federal or state website, as they must today under Obamacare.

The case for this kind of tax credit is compelling. It makes no sense to provide a generous tax break for employer coverage and nothing at all to a person who would like to work as an independent contractor and get insurance on his own. Moreover, providing a tax credit improves tax equity and makes it clear that all Americans will have the ability to get an affordable insurance plan, either through their place of work (if it is available to them) or through the assistance of a federal tax credit that is the equivalent of the subsidy for an employer plan.

There is also the practical reality that most of the uninsured people in the U.S. are in households with modest incomes and no access to an employer plan. If they receive no credit or other assistance, they almost certainly will remain uninsured.

As already noted, the tax credits in these replacement plans would be much more flexible than Obamacare’s subsidies. They could be used to purchase any state-approved insurance plan. Under some formulations, whatever isn’t used to pay premiums could be deposited in a Health Savings Account (HSA). And they are nothing at all like the individual mandate, which imposes a new tax on a person who is uninsured. A tax credit confers on the recipient a new tax break, and thus improves his financial position. If someone eligible for the credit declines to take it, he is no worse off than he was before.

It has been suggested that “Large HSAs” are a viable alternative to tax credits. The idea would be to repeal Obamacare and then, in its place, force all employers in the country to divert the funds they had been spending on health-insurance premiums into HSAs on behalf of their workers. The workers would then be free to use the HSA funds as they see fit, including for enrollment in an employer plan if one is available.

This idea is impractical on a number of levels. For starters, it is hard to see the GOP embracing what would amount to the largest employer mandate in history. The mandate would raise a number of difficult questions: Would employers be required to make these deposits every year in perpetuity? Would they have to make these deposits for new hires? What about employers with no such plans? Could a firm go out of business and then reconstitute itself with a different name to avoid the mandate?

While proponents of the idea like to say that employees could use their HSA funds to stay enrolled in their employer plans if they wanted to, employers aren’t going to keep running a health plan when they have no ability to control who enrolls in it. The Large HSA idea would, for all intents and purposes, end employer-sponsored health care for tens of millions of people. And it would do nothing to improve tax equity for those without access to an employer plan. They would get neither HSA deposits, nor the large tax benefits associated with them. This is not a serious replacement plan.

Opponents of Obamacare, after many years of effort, are finally making some progress, on both policy and political strategy. It would be a terrible shame if they undermined all of that good work now by embracing ideas that would make it much harder to reach their ultimate goal.